ECONOMY

Greek government plans income tax cuts

greek-government-plans-income-tax-cuts

Greece’s 2020 draft budget, to be submitted to Parliament next month, will stick to the target of a primary surplus equal to 3.5 percent of gross domestic product. At the same time, the government wants to introduce more tax-cutting measures besides the promised reduction in corporate taxes.

Shortly after the budget, the government will also submit a tax bill and a fiscal strategy midterm plan that will spell out its tax-cutting plans over its full four-year term. Before these documents can be submitted, however, the government must complete its discussions with Greece’s creditors, by which time some kind of agreement will have been reached as to what sort of impact the tax cuts will have on revenue and whether they are compatible with maintaining the budget surpluses at a level that will help substantially reduce the country’s debt. Greece and the creditors will also discuss whether to include the planned return of other European Union central banks’ profits from Greek bonds as part of the primary surplus.

The extent of tax cuts will also depend on the implementation of the 2019 budget – that is, on whether it will stick to its revenue and spending targets or exceed them – and on economic growth estimates for 2020.

Prime Minister Kyriakos Mitsotakis wants to unveil those tax-cutting measures in his speech at the Thessaloniki International Fair in early September, even before the talks with creditors are completed. The government hopes it will be possible that cuts worth about 1-1.5 billion euros can be introduced without affecting the primary surplus.

Mitsotakis’ promise that corporate tax will be reduced from 28 to 24 percent and tax on dividends from 10 to 5 percent is expected to carry a fiscal cost – that is, foregone revenue – of 600 million euros, if all other factors (corporate profits, dividends), as well as tax avoidance, remain constant. Finance Ministry officials, however, estimate that the cost will be lower because they forecast a significant rise in distributed dividends. The tax hikes depressed dividends from 3.8 billion in 2015 to 2.1 billion in 2018. If dividends rise again to over 3 billion euros, most of the fiscal cost will be covered. As for the declared corporate profits, they currently stand at around 13 billion. If they rise by 1 billion, the fiscal cost of tax cuts will be limited to 280 million, and if they rise by 2 billion, the fiscal cost will have essentially been nullified.

While corporate tax cuts have been promised, income tax cuts are, as shown above, still conditional on creditors’ approval. They include:

– Reducing the lowest income tax rate from 22 to 9 percent for incomes of between 8,600 (the current tax-exempt level) and 10,000 euros. The fiscal cost, with other factors being constant, is estimated at 500 million. If the measure is implemented in the 2020 budget, the self-employed will see the reduction happen for incomes earned in 2020, while, for salaried personnel and pensioners, it will take effect a year earlier.

– The abolition of the “solidarity contribution” in favor of lower incomes carries a cost of around 650 million. Again, it will affect the self-employed a year later.

– Lowering the top income tax bracket by up to 3 percent (from 45 to 42 pct) carries a big fiscal cost, but is a measure that can be applied gradually. This cut would benefit those with an annual income of over 40,000 euros.

– Abolishing the trade tax would cost 380 million, but would only apply to the self-employed.

– The further lowering of the property tax, from 30 to 20 percent, carries a cost of about 200 million.

– Providing the parents of each newborn with 2,000 euros will cost an estimated 180 million.

Data for the first seven months of the year show that the surplus target agreed with the creditors is achievable. Tax revenue was 573 million euros above target, despite the July election and despite the uncertainty over the measure to allow debtors to the state to settle their debt in up to 120 monthly installments. Revenue in July alone, when taxpayers had to pay the first instalment of their income tax, was 209 million above target. The next important milestone is September, with the upcoming payment of the second income tax installment, the reduced property tax and the first installment of past debts to the state. The Finance Ministry is counting on this latter payment.

In any case, the government believes that keeping the primary surplus target of 3.5 percent of GDP will be a strong point in the negotiations with the skeptical creditors, who foresaw a fiscal gap of 1 billion euros because of the corporate tax cut and the debt settlement.

Economic growth is a tricky issue: On the one hand, the government is hoping that the tax cuts and the efforts it makes to attract investors will boost growth. On the other, there is great uncertainty about the prospects of the European economy and the impact of a slowdown on tourism and exports. The government is hoping for a minimum of 2.2-2.3 percent growth in 2020, while the data for the first half of this year will be released in early September.